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The Key To Retirement Income Is The Guarantee, Not The Maybe

Founder of LifeUSA, retired Chairman & CEO of Allianz Life of North American, Senior Strategy Consultant to All Things Annuity.

Retirement brings on many life changes, the most impactful of which may be the loss of a regular income. From the first day at work until the retirement party, we are conditioned to living on the income earned on the job. The first thing that happens upon retirement is that the steady income we had come to rely on stops abruptly. The biggest challenge (and greatest fear) for most retirees is replacing the income earned while working.

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Retirees are faced with many questions: Where will the income come from? How much income will there be? How long will the income last? Sure, many have prudently built a nice nest-egg of savings and accumulated significant value in a 401(k) account, but these are lump-sums of cash that must be converted into income. Many retirees were good at earning a nice income during working years but have scant experience or expertise when it comes to creating an income once the salary stops.

Fortunately, when it comes to converting accumulated capital into retirement income, there are several viable options.

Investment companies offer plans to invest the capital and systematically spend down the funds to create an income. The drawback to this approach is that there is a real risk that the plan will not perform as projected, causing the income to be reduced or even disappear. The needed retirement income is based on a “maybe” and not a guarantee.

Insurance companies offer products -- called annuities -- that remove the investment risk and offer a fixed regular income that is guaranteed for as long as the retiree lives. The drawback to this approach is that the income produced by an annuity may not be sufficient to maintain the retiree’s current standard of living and funds, the income may not keep pace with inflation, and funds are not normally available for unexpected emergencies.

So, what should an individual who is seeking to replace a salary with income in retirement do? The answer is a little bit of both.

In retirement, income that is guaranteed is much more important than the projection of a “maybe” income. Just as we adjust our standard of living to the level of salary, in retirement it is easier to adjust how we live when a certain level of income is guaranteed. When the amount and duration of income are based on the uncertainty of investment results, there is the anxiety of an indeterminate income: not a good feeling in retirement.

Where To Start

The first step is to determine the bare minimum level of guaranteed income needed in retirement so that, come hell or high water, you can get by with the basics. Once the minimum amount of retirement income needed is established, it is fairly easy to calculate how much of that needed income can be provided by a combination of cash savings and capital available from your 401(k). There are a number of independent websites that offer tools that enable you to easily calculate how much guaranteed income your accumulated funds will produce. On your own, you will be able to easily calculate how much income your assets can produce.

Once you have determined what portion of the funds should be allocated to providing a minimum guaranteed income, the remainder can be put in investments. This approach provides the security of a guaranteed base of retirement income that will always be there, along with the potential for that income to increase if the investments do well.

No one can guarantee how long we will live in retirement, but it is possible to guarantee the peace of mind that comes with the security of a guaranteed income that will be there for however long it is needed.